Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Thursday, August 9, 2007

ASK THE TAX PRO – HOME OFFICE DEDUCTION FOR A RENTER

“For people with Schedule C income, is it wise to deduct home office expenses on Schedule C? I was thinking about paying a portion of my rent with a separate check and documenting it as a business expense. Doing this might put me in a loss for this year though... would it be a mistake?”

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If you qualify it is certainly wise to deduct your home office expenses on Schedule C. Not only will it reduce your income tax, but also your self-employment tax. And it will reduce your Adjusted Gross Income (AGI), which could provide additional tax benefits (see my posting on "The Most Important Number on Your Tax Return").

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If you rent, your home office deduction would be the appropriate percentage (generally based on the square-footage of your office area as it relates to the total square-footage of the apartment; you can also use a percentage based on the number of rooms – 1 room home office in a 5-room apartment means 20%) of the rent and utilities. You can choose to write a separate check for the home-office percentage or your rent from the business account if you like.

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The deduction must be claimed on IRS Form 8829 (Expenses for Business Use of Your Home). The rent would go on Line 18 and the utilities on Line 20. The deduction would not go on Line 29(b) of the Schedule C – this is where you would deduct rent if you leased an outside office or storefront.

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In the case of a home office in a rented apartment, the home office deduction cannot be used to create a loss on your Schedule C – only to bring it to “0”. If your qualified home office costs are more than your net Schedule C income before the deduction you can carry forward the excess deduction to be claimed in a future year when you have excess Schedule C income.

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With a home office in a personal residence it is possible that the deduction could create a Schedule C loss if the proportionate share of qualified mortgage interest and real estate taxes is more than the net Schedule C income before the home office deduction.

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While the home office can provide a helpful tax deduction, its main tax benefit relates to the deduction for business mileage. A qualified deductible home office means that you have no “commuting”. The home office is a qualified business location and if you leave your home and drive to visit a client, or purchase office supplies, or go to the bank, or take a package to the post office you can deduct the round-trip miles.

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According to IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses) - “If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business”.

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